As many people know, Piketty, a French economist, published a book last summer called “Capital in the Twenty-First Century” which became a huge hit, gaining praise and criticism from pundits all over the world. Piketty showed how the rich and their capital were getting richer. (I haven’t read the book but have read several articles discussing it.)

In Smith’s Bloomberg column, he highlights a criticism of Piketty by MIT doctoral student Matt Rognlie, who pointed out “that almost all of the increase in the value of capital over Piketty’s timeline comes from land, instead of from other forms of capital. In other words, it’s landlords, not corporate overlords, who are sucking up the wealth in the economy.”

Smith elaborates over several paragraphs, and uses modern-day San Francisco to highlight Rognlie’s point:

This is a very different story from the one we usually think of. Didn’t we relegate all-powerful landlords to the dustbin of history when we got rid of feudalism? Haven’t productive corporations replaced rent-collecting landlords as the wealthy class in advanced societies?

Maybe not. Urban economists believe that as density increases, productivity increases. This is what is known as an “agglomeration economy.” But as it becomes more valuable for people to work and live near each other, the value of central locations — of land — goes up. Landlords, who are producing no more than they used to, but who were sitting on advantageous locations, reap huge benefits.

In general, this will mean cities tend to be too small — the incentive to cluster together for higher productivity is choked off by the high price of land. The drain of urban income to landlords will tend to increase as the economy grows and the productivity advantage of cities increases. To see this in action today, just look at San Francisco, where the soaring price of land, and the accompanying surge in rent, has absorbed much of the wealth created by the new tech boom. Of course, this has been heavily exacerbated by the city’s refusal to allow more housing construction, which may be a reflection of the political power of landlords.

Rognlie’s results, and the theory of agglomeration economies, suggest that to fight wealth inequality, what we really need to do isn’t to redistribute income from corporations, but to redistribute income from land. How do we do that? Well, allowing more development in urban areas is a good start. But the real weapon here is the Henry George tax, or land value tax (LVT). This is like a property tax, but it taxes only the value of land, not the value of the structures built on the land. It encourages efficient use of land, while providing the most efficient method of wealth redistribution. Milton Friedman called it the “least bad tax.”

Using San Francisco is interesting because we do a lot of hard money lending in the city, helping buyers close a 7-day escrow or developers build condo units for resale. In both types of transactions, of which there were about ten in the past year, there was always a combination of tech money and real estate money coming together.

Smith’s column made the tech-real estate relationship much more clear to me. It makes sense that landlords are absorbing the tech gains in San Francisco and probably will be for years to come until development policy shifts or some form of Milton Friedman’s “least bad tax” policies are implemented to re-distribute the wealth.

Until that happens, it’s going to be business as usual in the city until something comes along to disrupt the long-term trend.